Protecting your super assets

Recent developments in superannuation and bankruptcy laws strongly reinforce the immediate importance of long-term savings plans, particularly for clients who are business principals, including professionals exposed to professional negligence claims.

Firstly, the Government’s proposals to replace reasonable benefit limits (RBLs) with new caps on contributions emphasise the importance of planning ahead to optimise clients’ use of the concessional tax treatment of superannuation where they can afford to do so.

Secondly, various recent changes and proposed changes to bankruptcy law heighten the focus on regular patterns of saving into superannuation.

The bankruptcy changes are on two fronts.

The first development is already law. Broadly, with effect from May 31, 2006, the new provisions expand the scope for bankruptcy trustees to recover property owned by, say, a spouse or family trust, where a bankrupt either previously owned the property or substantially funded its acquisition.

On the one hand, this development arguably increases the relative significance of the specific protections from creditors provided to superannuation under bankruptcy law.

On the other hand, the second development is new Government policy that actually affects those superannuation protections.

By way of background, generally property that belonged to a bankrupt on commencement of bankruptcy, or is acquired by them during bankruptcy, vests in the bankruptcy trustee, but an exemption exists for certain super and life insurance investments. Under current law, this exemption is generally regarded as subject to an overall value limit based on the bankrupt’s pension RBL.

However, even if the total value is within that limit, protection from the bankruptcy trustee may not be available if the investment has arisen from a ‘voidable’ contribution or rollover before the commencement date of bankruptcy.

For example, personal super contributions will not be protected against the bankruptcy trustee where, broadly:

n the main purpose of the bankrupt was to prevent, hinder or delay the contribution becoming available to creditors; or

n the contributions are made in the period starting five years before the commencement date. However, protection still applies if the super contribution was made within this five-year period but more than two years (four years if the trustee is a related party — that is, typically where the fund is a self-managed super fund) before the commencement date and the receiving fund trustee proves that the bankrupt was solvent at the time.

As a general proposition, it has been difficult for the bankruptcy trustee to make the case that one of these conditions existed to gain access to the bankrupt’s superannuation.

For example, if the fund trustee gives full market value consideration for the contribution, then that can assist the case for protecting the superannuation against the bankruptcy trustee.

The High Court decision in Cook v Benson is commonly cited as an indicator of the potential for the protection to apply, particularly in public offer fund situations.

So there has been a series of Government policy announcements and proposals aimed at limiting the protection of super contributions to appropriate circumstances.

The most recent announcement was by the Attorney General on July 27, 2006.

This sets out the Government’s new policy and is of immediate relevance because it is intended to apply to contributions made after that date.

Broadly, the new policy will allow the Court to consider the bankrupt’s historical contributions pattern and whether any contributions were ‘out of character’ in determining whether they were made with the intention to defeat creditors. This further emphasises the importance for clients to consider a regular and long-term savings approach to their retirement plans.

The proposed amendments will also:

~ allow a bankruptcy trustee to recover the value of contributions made by the bankrupt to defeat creditors where the contributions were made to the bankrupt’s own superannuation plan and that of a third party;

~ allow the trustee to recover contributions made by a person other than the bankrupt for the benefit of the bankrupt where the bankrupt’s main purpose in participating in the arrangement was to defeat creditors;

~enable the bankruptcy trustee to recover contributions irrespective of whether the trustee gave market value consideration for the contribution; and

~ provide that the superannuation fund will not have to repay any fees and charges associated with the contributions or any taxes it has paid in relation to the contributions.

Legislation giving effect to this announcement is to be introduced soon.

Given that the Government proposes to abolish RBLs for tax purposes, it will be interesting to see whether the pension RBL or some similar limit is retained for bankruptcy purposes.

It is quite possible, given the Federal Government’s recently announced proposals to place more effective constraints on contributing to superannuation for bankruptcy purposes, that it will remove the limit altogether.

In short, on the one hand, starting a regular superannuation savings plan early and when a client is solvent may improve the chances that a client will have some level of asset protection in the event of bankruptcy.

On the other hand, if in advising a client you get a sense that the client may already be facing insolvency, then it would be best to walk away from providing asset protection advice and avoid the possible civil or even criminal penalties.

David Shirlow is head of technical services at Macquarie Adviser Services.